Internationally-acclaimed economist Dr. Elliot Eisenberg offered a largely optimistic 2020 economic outlook Monday morning at Defiance College during a speaking engagement hosted by The State Bank and Trust Company.
Eisenberg, a former senior economist with the National Association of Homebuilders in Washington, D.C., opened by noting that economic recoveries don’t die of old age, rather, of bad luck, or bad policy.
“Eventually something is going to kill the economy, inevitably, but there’s no reason why it has to end this year,” Eisenberg said.
Eisenberg earned his bachelor’s degree in economics with first-class honors from McGill University in Montreal, then a master’s degree and Ph.D. in public administration from Syracuse University. He is the creator of the multifamily stock index — the first nationally recognized index to track the total return of public firms principally involved in the ownership and management of apartments.
Eisenberg has authored more than 85 articles, and his research and opinions have been featured in Bloomberg, Business Week, Forbes, Fortune and other publications. He is a regularly featured guest on cable and radio news programs.
What was once a manufacturing-based economy, he said, is now a service-based one, which works to mitigate against recessions.
While the Gross Domestic Product (GDP) has declined from 2.9% in 2019, to about 2.3% last year and could fall below 2% this year, Eisenberg called it “a benign decline.”
“We’re running out of workers, there’s a little less inventory buildup ... but nothing is fundamentally wrong,” Eisenberg said.
What seems like a downturn, he added, is instead a return to normalcy after an aberrant 2018.
“The aberrant year was there because we had massive tax cuts, and they’re going away,” Eisenberg said. “The impact of them is just completely dissipating, and growth is declining, and there turns out to have been no permanent benefit to our economy, essentially, from the tax cuts.”
As for the stock market, Eisenberg noted that while “every week is a new all-time high,” he is remaining skeptical.
“There are two reasons why stocks should go up: either profits are better ... or PE (price-to-earnings) ratios go up because interest rates fall,” Eisenberg said. “I’m not too optimistic on either one — but there’s no reason (the stock market) should necessarily fall, either.”
Housing prices are up, he said, but lending is being done more responsibly.
“Maybe we’re not lending as much as we’d like to, because we can’t, but (borrowers) are certainly qualified,” Eisenberg said.
The biggest problem for the whole economy, albeit not for banks, are student loans, he said.
“The pressure to socialize those costs will become very large as these Gen Z-ers become voting age,” he said. “There is certainly a trend toward discharging the student loans.”
Young people overburdened by loans may opt not to marry, buy a home or have children, leading to what Eisenberg called “demographic problems.”
“Younger households really legitimately do have a harder time; that’s why it’s taking them longer to do all kinds of things,” he said, adding that nonetheless, collectively, households are in decent shape, and total borrowing today is barely higher than it was 12-13 years ago.
However, problems are beginning to arise in the areas of auto and credit card lending, he said.
“Those little ones we want to focus on right now — there is something clearly going on in those sectors of the economy,” Eisenberg said.
Still, he noted bad auto lending can’t do anywhere near the damage done by the subprime mortgage crisis that preceded the Great Recession. Auto loans collectively total $1.3 trillion, while the home industry was at $10 trillion then.
“These auto company loans ... They don’t care if you qualify for the loan, that’s somebody else’s problem, but they are making so much money on the financing, they need to get the car sold,” he said. “You don’t qualify? It doesn’t matter. We’re going to lend you money anyway. There’s an incentive problem here.”
Credit card lending has become a problem too, albeit to a lesser extent. It’s bad lending, Eisenberg said, but nothing that stands to wreck the economy.
“It’s more youngsters doing late-cycle dumb things, ‘Oh yeah, let’s borrow for our Tahiti vacation,’ that’s the perfect example,” Eisenberg said. “That’s the wrong reason to borrow money. Buy a car, go to school, don’t go on vacation.”
Still, he added, consumer sentiment is high, and jobs are plentiful — two things, he said, that are not unrelated.
“This recovery could easily go on,” Eisenberg said. “I’d be shocked if we had a recession by the end of 2020. A nuclear exchange with Iran could wreck our day, but short of that, it’s really hard to see it.”
Though transportation, agriculture, energy and manufacturing are in recession, it’s not enough to drive the economy at large into the same, Eisenberg said. With consumer and government spending (about 83% of the GDP) increasing, “the other 17% has to fall like an anvil in a Bugs Bunny cartoon to get a recession,” Eisenberg said.
As for banks, the economist said they have two options: get bigger, or get sold.
“Every time Congress adds legal requirements to the burden of a bank, it encourages more mergers,” he said, noting such moves prompt 50-100 mergers each quarter.
Eisenberg also pointed out that despite a 50-year-low unemployment rate, wage growth is going down a bit, due in part to the shedding of high-paying manufacturing jobs.
“Because of this, there’s no inflation,” he said. “Because there’s no inflation, the fed can lower rates. Never before, late in the cycle, has the fed been able to lower rates.”
Before taking questions, Eisenberg briefly touched on politics, stating he thinks impeachment “doesn’t matter at all” where the stock market is concerned, but adding that historically, the presence of a primary challenge from the incumbent’s own party is a bad sign for presidents seeking re-election.
“Every time that an incumbent faces a challenge in the primary, they have lost the general election,” he said. “All else equal, having a primary opponent says something is wrong.”
Despite this, he added, “the power of incumbency is really strong.”
Further, Eisenberg maintained that it’s the composition of Congress — not necessarily who sits in the White House — that will determine what gets done.
“As long as the expectation is Republicans hold the Senate, and the expectation is Democrats will keep the House ... the chances of something major happening, regardless of who wins, are very, very slim,” Eisenberg said. “They’re not going to pass major pieces of legislation.”